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Insurers face tax axe, policy cost likely to rise
August, 24th 2006
Service tax has come back to haunt life insurance companies. The Central Board of Excise and Customs has said that insurance companies should pay service tax for providing asset management services. An imposition of service tax on asset management would either increase charges for policyholders or add to the life insurers losses. The Central Board of Excise and Customs has said that insurance companies should pay service tax for providing asset management services. For insurance companies, the bigger problem is that of changing their systems. Insurers have already had to change their systems twice. The first time was when service tax was applied on life premium, and the second time was when Ulip guidelines were revised. The tax authority has asked several Mumbai-based life insurance companies the extent of their income from asset management. Some companies have taken the stand that the charges levied on policyholders are not asset management charges. The department, in turn, has told them to sign a declaration that no asset management charges are being levied. Private life insurers manage close to Rs 20,000 crore mobilised through sale of unit-linked insurance policies. The fees on this range vary from a low of 0.5% for group retirement benefit plans to just below 2%, depending on the type of scheme. Mutual funds pay service tax on the asset management fees that they receive. Insurance companies pay service tax only on the risk premium the charges levied for providing life cover. Service tax on life insurance premium was first proposed by then finance minister Yashwant Sinha four years ago. It was later fully withdrawn by Jaswant Singh when he was the finance minister, only to be reintroduced on risk premium. Fund management or administration charges are more relevant to unit-linked insurance. In traditional policies, there is no asset management charge as all the premium goes into a central life fund. All charges are deducted from the life fund and any surplus is distributed to policyholders in the form of dividend or bonus. For insurance companies, the bigger problem is that of changing their systems. If the service tax is to be passed on to the policyholder, it has to first figure out the value of his holding. Since this can be ascertained only after he pays the premium, the tax can be collected through cancellation of units. Insurers have already had to change their systems twice. The first time was when service tax was applied on life premium, and the second time was when Ulip guidelines were revised.
 
 
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